There are so many different types of agreements in angel investing. It can be pretty overwhelming and confusing, especially if you’re new to the space.

Spend a few minutes perusing private equity deals, and you’re likely to find yourself looking at multiple different types of offerings. Sometimes, you’re buying equity, pure and simple, straight out of the gate. Other times, you’re looking at other types of agreements: convertible notes, debt financing, and more.

But there’s one type of deal term that’s fairly new on the scene… and it’s taking the angel investing world by storm.

Every day, I see more and more of these offerings pop up. They’re everywhere!

As you start getting into the rhythm of startup investing, you’re bound to run into them.

These agreements are called SAFEs, or Simple Agreements for Future Equity. They were developed by Y Combinator, a prominent startup incubator in Mountain View, California.

Basically, it’s a contract that ensures your investment dollars will convert into shares of equity… eventually. This conversion will occur only if a “trigger event” occurs; most often, these events include new rounds of funding and acquisitions.

If that sounds a little vague to you, it’s probably because it is vague – intentionally. Before you let this unique deal term scare you off, let me explain why it exists in the first place.

Generally speaking, startups seeking angel investments have little to no spare capital. While many do have revenue, that figure is often eclipsed by the extraordinary expense of launching and running a business. In fact, some of the most successful startups out there spent at least a few years buried deep in the red.

That’s why SAFEs are so popular – the documents are open-source, freely distributed, and cost startup founders very little money, if any, to use.

Further, because SAFEs do not immediately transfer equity to new investors, they help startups keep their “cap tables” clean. (Not sure what a cap table is? Click here to learn more.)

A cluttered cap table too early in the game can turn off big investors down the line. That’s why it’s so beneficial for startup founders to promise their earliest investors equity later – once the big investors are already in the mix.

Now, whenever possible, I still prefer to invest in “priced rounds,” because I like to hold my equity right out of the gate. But I absolutely understand why so many startups are choosing to go with SAFEs instead – and I won’t let such a small detail keep me out of a good deal.

Still, I’ll only sign onto a SAFE if the startup I’m buying into follows my 1,000X Formula. Why? Because in order for a SAFE to work in my favor, that startup needs to proceed to the next milestone successfully.

That’s no small task for an early-stage startup. In fact, studies show that well over 50% of them fail entirely.

Thankfully, that’s simply not the case for startups that pass my formula. It’s taken me well over a decade to perfect this strategy, but it’s all worth it. My batting average can attest to that.

Curious about the 1,000X Formula? Click here to learn what it is – and how to make it work for your own portfolio.

Until next time,

Neil Patel

Comments

19 responses to “This New Way of Making Deals Is Red-Hot… Here’s What You Need to Know”

  1. I’m very interested in this investment. I’m a simple guy, retired after 40 years grocery store worker, currently 65yrs of age. I lost most of my 401k money in 2008 or 2009.
    I’m still attracted to young women. I need a windfall.
    Anyway, Neil, take me by the hand, I need more golden yrs play money!

  2. I want to started as soon as possible. How can I invest in the grocery delivery business now. I would
    Iike to know. Thanks.

  3. How do I get start with investing in some of the investments out there. Like the bird company, the grocery delivery business, or some of the other businesses. Please let me know if there’s a waiting period. Thanks for any information you can give me.

  4. I joined startup
    My card got hacked and I’m not sure that my payment to join has been paid
    Please give me a call

  5. Neil,
    I too am very interested in this investment. I’m retired, 70 years of age, lost my retirement due to a bankruptcy filed by the company I worked for, for 20 years. Currently living off VA disability, Social Security and my wife retirement. I know nothing about investing and need to be taken by the hand and led in the proper direction. I need to make, at minimum, 5,000 a month to pay bills. I’m hoping you can lead me and teach me what I need to do. I’m in your hands.

    • I would like to know if you got the help you needed. I am very interested also but like you I don’t know what to do. I need to be taken by the hand also,. I can’t afford to loose what little bit of money I have. I am divorced and alone so I would need a lot of guidance. There are so many fraud people out there that just take your money and leave you with nothing.

  6. Neil what is the potential of a $ 100.00 investment worth in angels financing ,I look at a calculator that shows a $1oo.oo investment with a 20,000,000 cap will only return $250.00 not that exciting and to wait years for this . where is the incentive

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